The release of Ontario’s 2010 budget will come mostly as good news to plan sponsors of defined benefit (DB) pension plans. References to pension reform and innovation abound, as do promises to hold consultations. However, there are no references to defined contribution (DC) plans and no firm commitments on any issue.

Pensions
Ontario Finance Minister Dwight Duncan appears to be making good on his promise to move forward on pension reform in the following areas:

• modernizing the Pension Benefits Act (PBA);
• enhancing multi-jurisdictional regulation; and
• addressing solvency funding relief and sustainable public sector pension plans.

PBA
Changes to the PBA involve Bill 236, the Pension Benefits Amendment Act, 2010, which involves the following measures:

• consultations are to be held on regulations to Bill 133 regarding new rules for the division of pension on marriage breakdown;
• funding relief for single-employer DB public sector pension plans on both a permanent and/or temporary basis, provided the plans are restructured to provide for joint risk-sharing and joint decision-making;
• finalization of an agreement on the regulation and administration of multi-jurisdictional plans, joining the likes of Quebec and Alberta;
• proceed to the next stages of reform, including:

• funding should be required for all benefits that a plan provides;
• risk and responsibility should be shared among stakeholders; and
• funding rules should match benefit and governance structures.

• explore reforms that would:

• encourage innovative plan designs, though they seem to be restricted to “flexible pension plans” as allowed by the Income Tax Act;
• permit the use of letters of credit to partially satisfy solvency funding requirements;
• clarify procedures for determining surplus entitlement when a pension plan winds up; and
• set thresholds for annual valuations.

Pension Investment Rules
Upon finalization of federal pension investment rules, Ontario will consider the appropriateness of these rules for Ontario-registered plans, including the 30% rule, which prohibits a plan from owning more than 30% of the voting shares of a corporation.

The Pension Benefits Guarantee Fund (PBGF)
The government is awaiting the results of an actuarial projection study of PBGF premiums and benefits, due this spring, which will inform its decision on the future of the PBGF. However, the budget includes a $500 million grant to the PBGF in 2009/10 to cover short-term claims, particularly a pension backstop for former employees of Nortel Networks. However, the budget makes no reference to long-term sustainability of the fund.

Future reforms
Ontario has pledged to seek input into various retirement income models such as an expanded Canada Pension Plan, supplementary DC plans, innovative pension solutions including target benefit plans and tax reforms to facilitate higher retirement savings.

Tax
While the previous budget introduced the 13% harmonized sales tax (HST), which came into effect July 1, 2010, the 2010 budget indicates that an amendment will be made to the Retail Sales Tax Act to exempt administration fees for benefit plans so that they are not subject to both taxes.

Scott Clausen, a partner with Mercer, explains that this budget is not particularly significant as far as plan sponsors are concerned. Instead, it is an admission that action is needed and discussions will take place.

“I see a firm commitment toward consultations and reviewing potential changes,” he says, “but there isn’t anything concrete with respect to what will happen.”

He says the lack of a firm commitment on any one theme is due to the upcoming finance ministers’ meeting in May, during which many of these issues will be discussed.

According to Martine Sohier, senior consultant with Towers Watson, many of the announcements contained in the budget were expected, as they build on the recommendations of the 2008 Expert Commission on Pensions. She explains that elements of the budget favourable to plan sponsors include the ability to use letters of credit to help secure solvency funding as well as the encouragement of “innovative design” of pension plans, namely flexible plans. However, she points out that it is still very early to discuss particulars.

Both Sohier and Clausen would liked to have seen a reference to pension security funds (as proposed by the Alberta British Columbia Joint Expert Panel on Pension Standards), which allow plan sponsors to use a separate trust to deposit solvency contributions. Mainly applicable to single-employer private sector plans, the solvency contributions go into a side fund and can be returned to the plan sponsor if there are sufficient assets to pay the promised benefits.

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